Finance FINAL

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Assume the economy has a 12 percent chance of booming, a 4 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 18.7 percent in a boom, 14.4 percent in a normal economy, and lose 12 percent in a recession. What is the expected rate of return on this stock?

(.12 x .187) + (.84 x .144) + [.04 x (-.12)] = .1386

Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 8.81 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent?

14.52 percent

a risky security has less risk than the overall market what must the beta of this security be

> 0 but < 1

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset.

Beta Coefficient

the security market line is a linear function which is graphed by plotting points based data points based on the relationship between which two of the following variables

expected return and beta

Which one of these represents systematic risk? -Surprise firing of a firm's chief financial officer -Increase in consumption created by a reduction in personal tax rates -Major layoff by a regional manufacturer of power boats -Product recall by one manufacturer -Closure of a major retail chain of stores

increase in consumption created by a reduction in personal tax rates

Standard deviation measures _____ risk while beta measures _____ risk.

total, systematic

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

β[E(RM) -Rf]

Which Statement is correct, all else constant?

B- A decrease in a firm's WACC will increase the attractiveness of the firm's investment options.

S&W has 21,000 shares of common stock outstanding at a price of $29 a share. It also has 2,000 shares of preferred stock outstanding at a price of $71 a share. The firm has 7 percent, 12-year bonds outstanding with a total market value of $386,000. The bonds are currently quoted at 100.6 percent of face and pay interest semiannually. What is the capital structure weight of the firm's preferred stock if the tax rate is 34 percent? A. 12.49 percent B. 9.00 percent C. 8.24 percent D. 11.84 percent E. 13.63 percent

Common stock = 21,000 × $29 = $609,000 Preferred stock = 2,000 × $71 = $142,000 Debt = $386,000 Value = $609,000 + 142,000 + 386,000 = $1,137,000 Weight of preferred= $142,000/$1,137,000 = .1249, or 12.49 percent


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